I love the Property Brothers, and a myriad of the other DIY shows on television. However, there is a big problem. It comes from the average homeowner not having Chip and Johana in their back pocket doing renovations at huge discounts and at the exact same time setting expectations of a home so high. Every time I hear the words “Dream Home” I cringe, and it happens a lot.
There is a new infatuation with the perfect house, huge amounts of space and beautiful finishes. I’m not sure if it is just because of too much HGTV, Flips, or just keeping up with the Jones, but we have a disconnect with wants and needs when it comes to a house in western culture.
When I see trends like this, it always makes me think. I personally know plenty of people remodeling kitchens and homes with nothing wrong with them. Yes, it is nice to have a nice home or that extra counter space, but people get used to whatever they have. So I do what I always do, follow the money.
So many companies and people make money off of remodels, flipping homes, and people trying to have the shiniest new item. There is a huge vested interest in this culture in getting you to want those fancy stainless steel appliances and perfectly decorated home. Including Realtors, and all the companies feeding off of them.
But really? It is a want, not a need, and if you really weighed the cost, you might think that 80’s kitchen in good condition on a moderately priced home is the actual want.
How the Dream Home can become a trap:
The bigger the house you have the higher utility payments you have to make. This over the lifetime you are in your home can really add up. It might make it worth it to get a pull out couch instead of a spare guest room.
- “Nationally, based on data from UtilityScore, people in single family homes spend a median of $2,715 annually ($226 monthly) on utilities, or $1.68 on a square foot basis, or 1.4% of the median single-family home value.”
Not to mention the mortgage, maybe the flip in the area is only 20,000 more, and your thinking but I don’t want to pay for workers to upgrade it myself.
Let’s take a mortgage amount of 100k at a 4.5% interest, over 30 years that cost you $182,407. Yipes! That interest really sneaks up on you. So what does that extra 20k cost you in the long run? A 120k mortgage at 4.5% interest over 30 years costs you $218,888. So that 20k extra asking prices actually is more like 36,481 and it can get a whole lot worse depending on your interest rate.
Did I forget to mention that property taxes and insurance are also strongly weighted off the price and size of your home.
And of course lets not forget your most precious asset, your time. That is more time cleaning, landscaping, doing maintenance, or more money to pay someone else to do it for you.
Lets put it all together, I’m going to use the Tucson, AZ market because I know it well. This is a nicer area of Tucson but by no means one of the high-end areas.
Note: Larger houses and more expensive homes go hand in hand when you are comparing directly in the same neighborhood. However, when you start comparing different prices per square footage due to upgrades or different neighborhoods it can make things more complicated, older bigger homes have higher utilities and more repairs, however higher prices regardless of the condition increase price across the board with mortgages, insurance, and taxes.
Okay, so now can actually see the weight of this financial choice, it is time to talk about what you actually need. That is a pretty huge amount of money for 500 sqft or a 75k difference in price. That could be a modest retirement if it was put into the stock market or used to buy a rental property cash.
How to take charge of own decision:
Remember to stick to your needs. There is a counter-culture movement going right now for tiny houses. People are getting sick of working just so they can afford their house and cars. While I’m not so extreme as to think that is the way to go, as I believe these homes offer very little flexibility and people burn out of them frequently. I do have a family of five living in a 1400 sqft home, and frankly it feels spacious, we even rented a room out to a family member for a while and it still felt fine. I do want to preface that by saying we really do enjoy each others company!
Minimize your losses by buying a forever home. Ideally, financially, you will buy a home and keep it for the rest of your life. Not too many people do this, but it is the wisest financial decision and gives you that paid off residence for retirement. If you choose to part, like most people do at some point because you choose something that will not carry through your life, you will eat 10% of your total property price when you sell, and also lose 3% of purchase price and start the interest-heavy years of your mortgage all over again.
I like to look at houses in terms of flexibility.
- Does it have rooms that could easily serve different purposes, depending on whats happening in your life?
- If you were to move out could you rent it out and have it at least cover all costs?
- How much of the home is rarely usable space?
- Could I negotiate the cost of repairs at a lower price, then take my time getting to them?
Take your time, buying a home that is not right for will hurt you more financially than paying extra rent while searching for the one that works. Remember choosing the wrong home can lead you to getting caught in a financial trap.
I not saying don’t get the waterfall countertops or the huge backyard, just make sure you weigh the true value to you and know the difference between your needs and wants. You can always upgrade when things wear out and pay cash for it so your not eating 30 years of interest on a renovation that will not last that long.
Have you ever had a dream turn in to a nightmare?